JAPANESE firms are caught in the crossfire of the trade dispute between the United States and China, as a resurgent yen threatens to sap profits and complicate the economic outlook.

Worsening trade friction between the world’s two largest economies has reduced investor appetite for risk and boosted assets perceived to be safer bets, such as gold and the yen.

Japan’s currency is now near its firmest level in eight months against the U.S. dollar, and exporters in the world’s third-largest economy are preparing for pain.

Toyota Motor Corp. reported its best quarter in four years two weeks ago, but cut its full-year outlook on the yen.

“We’re going to be affected by a stronger yen this year, so to offset this as much as possible we have been taking extra measures to reduce fixed costs and cut down on expenses,” said Kenta Kon, a Toyota manager.

Japanese exporters regularly hedge against currency fluctuations, but a strengthening yen still hurts them because it makes their electronic appliances, semiconductors and cars more expensive overseas. It also decreases the value of overseas earnings when they are brought home.

The economy expanded at an annualized 1.8 percent in the second quarter, data showed Friday, beating expectations of a 0.4 percent increase. Robust household consumption and business investment offset the hit to exports, which fell 0.1 percent.

But the outlook for exports could be further complicated as firms are saddled with a strengthening yen.

“The escalating U.S.-China trade war and the yen’s rise are negative factors for Japan’s economy,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

“There’s a pretty good chance the timing of a pick-up in exports could be delayed,” he added.

Toyota expects the stronger yen to knock 350 billion yen (US$3.3 billion) from its operating profit in the current financial year, roughly double its previous forecast and a big increase from last year’s 50 billion yen impact.

The automaker, Japan’s largest company by revenue and market value, expects the yen to average around 106 to the U.S. dollar in the current financial year, against a previous assumption of 110 yen.

Other exporters have signalled the possibility of currency pain. Sony Corp. now expects the yen to average 108 yen this year, from its previous forecast of 110.

(SD-Agencies)